People familiar with the plans of the UK’s top financial regulatory body say that it is planning to conduct a comprehensive review of private market valuations amid rising concerns about the impact of increased borrowing costs on this sector.
One person said that the Financial Conduct Authority exercise, which comes after a major review on asset managers’ liquidities in the wake of last year’s UK Bond Market turmoil, will examine the “disciplines” and “governance” of valuations.
The person stated that this includes examining who is responsible for valuations within the firm, how the information is communicated to the management committees and boards, and other governance procedures.
The FCA will launch the exercise by the end the year. This comes at a time when global regulators are growing increasingly concerned about the possibility of a market crash in private assets or other markets after the abrupt reversal following more than ten years of low interest rates.
Recently, the International Organization of Securities Commissions, a global securities watchdog warned that the global private capital sector , worth $13tn, was complacent regarding the potential risks. They highlighted valuations as an area where vulnerabilities could arise.
Private assets, such as real estate, unlisted bonds and shares are valued by models that typically respond slower to market changes than listed assets.
Assets are typically valued quarterly, so a sudden market correction could take weeks or even months to reflect in the valuations.
Fund Managers Who invest in private markets have a greater degree of discretion when valuing their assets, as they are not affected by the daily fluctuations of the public market.
The FCA can point out failings if it does not believe that the governance process is robust. The person said that if a firm doesn’t respond, it could be ordered to improve, as valuations “are part of the risk environment for regulated companies”.
The second person stated that the review was not yet complete and would begin later in the year. Person said that the number and type asset management firms involved had not been finalised.
The FCA has declined to comment.
The FCA is the primary regulator of the UK’s PS11tn Asset Management Industry, which includes 2,600 firms. These include hedge funds, private equity and venture capital, as well large institutional asset management firms.
Richard Olson is a valuations specialist at Lincoln International. He said that the FCA probe could serve as a “wake up call” and could lead some funds to outsource valuations.
A senior executive from a large institution asset manager praised the review. He said that private markets cannot just mark their models. There needs to be an independently verified process.
The FCA criticized asset manager’s liquidity management in July. It warned that their plans for dealing with large-scale redemptions were “incoherent” and demanded improvements.
US regulators responded to concerns about private markets with by ordering private funds make more comprehensive disclosures about their expenses and performance. This initiative has led to a lawsuit filed by a coalition of venture capital, private equity and hedge funds.